Robot assembler work on cars during the assembly process at Nissan Motor Company's Kyushu Plant on November 23, 2007 in Kiyakyushu, Japan.

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Japan's core machinery orders unexpectedly rose for a second straight month in July, easing some pessimism over capital expenditure, but worries remain that weak demand and the yen's gains will discourage companies from boosting investment.

Prime Minister Shinzo Abe's government has been counting on capital expenditure to drive private sector-led growth, but business investment has been slow to pick up because of the uncertain outlook and external headwinds.

Cabinet Office data showed on Monday that core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, rose 4.9 percent in July from the previous month.

That compared with a 3.5 percent decline expected in a Reuters poll of economists and a 8.3 percent increase in June.

The reading followed a recent run of weak indicators including exports, factory output and household spending, helping to allay fears that the economy lacks momentum in the current quarter.

The Cabinet Office raised its assessment of machinery orders, saying it saw a pickup.

Reflecting the fragility of external demand, overseas orders - which are not included in the core calculation - fell 11.7 percent in July from June.

Core orders, which excludes ships and electrical equipment, increased 5.2 percent in July compared with a year earlier versus a 0.3 percent gain seen by economists.

Japan's economy grew at an annualized rate of 0.7 percent in April-June, revised up from initial estimates but much slower than the prior quarter's growth led by leap year effects, as exports and capital spending sagged.

With growth struggling to accelerate and inflation sliding away from the Bank of Japan's 2 percent target, most analysts expect the central bank to loosen policy later this month when it conducts a comprehensive assessment of its monetary stimulus policies.